LKAS 17
LEASES
LKAS 17
FINANCE AN ASSET
How to acquire an asset?- Purchase- On Lease Terms
- Operating Leases- Finance Leases
- On Hire Purchase Terms
What are the difference in above methods?
LKAS 17
What is a lease?
LEASE ARRANGEMENTS
A lease is an arrangement whereby the lessor coveys to the lessee in return for a payment or series of payments the right to use an asset for a agreed period of time.
LESSEE
LESSOR
Right to use an asset for a agreed period
Series of payments
LKAS 17
TYPES OF LEASES
LEASE ARRANGEMENTS
FINANCE LEASE OPERATING LEASEIs a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.
Is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset.
Important Factor for categorization is :Whether substantially all the risks and rewards incidental
to ownership of an asset is transferred or not.
LKAS 17
CATEGORIZATION OF LEASES
Depends on whether :-The lease transfers ownership of the asset to the lessee by the end of the lease term.-The lease term is for the major part of the economic life of the asset even if title is not transferred.-The present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.-The leased asset is of such specialized nature that only the lessee can use the asset without major modification.- The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value of the asset.
LKAS 17
By the Lessee e.g.
ACCOUNTING FOR FINANCE LEASES
Lease creditor Sampath Bank PLCType of the asset Motor vehicle – ABC 2525Lease agreement number HOLELE 0123456Cost of the asset Rs. 1,000,000Start date 24th May, 2015No. of rentals 60Monthly rentals Rs.20,000
What are the journal entries to be passed in regard to above for the year ended 31st March,2016?
LKAS 17
-Interest on finance lease needs to be allocated to monthly rentals.
ALLOCATION OF INETEREST
- There are theoretically three methods :- Straight Line Method- Sum of Digit Method- Effective Interest Rate (IRR) Method
Which method is more practically appropriate???
LKAS 17
Following Excel templates are available :
EXCEL TEMPLATES
- Sum of Digit Method- Effective Interest Rate (IRR) Method
Above templates are usable if- payments are made in regular intervals- number of rentals are less than 200
LKAS 17
Balance remaining in the Lease Creditor’s Account shall be divided as follows :
LEASE CREDITOR – CLOSING BALANCE
- Payable within one year- Payable between one year and five year- Payable after five year
LKAS 17
Leased asset is subject to depreciation in line with LKAS 16 as follows :
LEASED ASSET
- Over the period that is consistent with that for the owned asset
- Over the shorter of the lease term and its useful life if
- there is no reasonable certainty that the lessee will obtain the ownership by the end of the lease term
LKAS 17
-Recognition of leased asset
LETS BE TECHNICAL
At the inception of the lease, the lessee shall recognize the leased asset as follows :
- Fair Value of the asset XXXX
- Present Value of the minimum lease payments XXXX
Lower Amount
- How do we explain capitalization of COST of the leased asset does not violate above rule ????
LKAS 17
- Dealing with V.A.T.- V.A.T. included in rentals
- Accounting treatment depends on whether the LESSEE can claim as an input V.A.T.
- If V.A.T. can be claimed,
V.A.T. Control Account Dr XXX Bank Book XXX
- If V.A.T. can not be claimed,Irrecoverable V.A.T. Dr XXX Bank Book XXX
LETS BE TECHNICAL (Con’t)
LKAS 17
- Dealing with V.A.T. (Cont’)- V.A.T. included in cost of the asset
- Accounting treatment depends on whether the FINANCIAL INSTITUTION can claim as an input V.A.T.
- If V.A.T. can be claimed,Just ignore.
- If V.A.T. can not be claimed,Asset Account Dr XXX Lease Creditor XXX
LETS BE TECHNICAL (Cont’)
LKAS 17
Lease payments under an operating lease shall be recognized as an expense on a straight line basis over the lease term unless another systematic basis is more representative of the pattern of the user’s benefits.
Journal entry would be ; Rent expense Dr xxxxx
Bank book xxxx
OPERATING LEASES
LKAS 17
Test your knowledgeRNH Company had a vehicle numbered WPL 1125 as at 31st March,2014. During the audit for the year ended 31st March, 2015 you found the following lease agreement entered into with Sampath Bank.
Customer RNH CompanyVehicle Harrier WPL 1125Cost Rs. 10,000,000Monthly rental Rs.250,000No of rentals 48
What is this transaction?
SALE AND LEASEBACK TRANSACTIONS
This is a LEASE AND SALEBACK TRANSACTION
LKAS 17
How to account for :
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Depends on the NATURE of the sale and leaseback transaction
If it results in a finance lease ; Excess = Sale proceeds – Carrying amount
shall not be recognized immediately instead it shall be deferred and amortized over the lease term.
Why the excess is deferred and amortized without recognizing it as an income???Substance of the transaction is that the lessor provides finance to the lessee with the asset as a security
LKAS 17
How to account for (Cont’) :
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Depends on the NATURE of the sale and leaseback transaction
If it results in an operating lease ;Excess = Sale proceeds – Fair value
should be treated as follows : Rule 1 - Where selling price = Fair value
Rule 2 - Where selling price > Fair valueRule 1 - Where selling price < Fair value
Rule 1 - Where carrying = Fair value
Recognize profit/loss immediately
Defer and amortizedDefer and amortized if it is compensated by future rentals
Write off immediately
LKAS 17
Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 160,000
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Disposal AccountCV 100,000
Cash(Sp) 160,000Profit(P&L) 60,000
160,000
160,000
LKAS 17
Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 140,000
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Disposal AccountCV 100,000
Cash(Sp) 160,000Deferred 20,000
income
160,000
160,000
Profit(P&L) 40,000
LKAS 17
Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 190,000Future rentals will be compensated
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Disposal AccountCV 100,000
Cash(Sp) 160,000Profit(P&L) 90,000
190,000
190,000
Deferred 30,000expense
LKAS 17
Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 60,000Fair value Rs. 90,000
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Disposal AccountCV 100,000
Cash(Sp) 160,000Profit(P&L) 90,000
190,000
190,000
Deferred 30,000expense
LKAS 17
Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 60,000Fair value Rs. 90,000
SALE AND LEASEBACK TRANSACTIONS (Cont’)
LKAS 17
SALE AND LEASEBACK TRANSACTIONS (Cont’)
Disposal AccountAsset 90,000Cash(Sp)
60,000
90,000
90,000
Loss(P&L) 30,000
Asset AccountCV 100,000
100,000
100,000
Disposal A/c 90,000Loss(P&L) 10,000
LKAS 17
LEASES
Thank You